Emerging markets mixed to better; spreads tighten with equities; primary quiet; Brazil leads

By Aaron Hochman-Zimmerman

New York, Aug. 18 - Emerging market credit began the day sluggishly as equities fought off disappointing U.S. housing data.

Later in the day, credit levels mounted a comeback as U.S. retail earnings data were able to inject optimism back into the session.

Latin America outperformed as many issuers acted as though there had never been a credit crisis, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Brazil showed rare strength, which inspired the category.

Brazil's 11% bonds due 2040 were quoted at 131 5/8 bid, 131¾ offered.

The primary market was silent for another day, but rumors of a Brazil bond offering could still be heard, along with rumors of more Brazilian corporate offerings.

After a large jump on Monday, volatility was pared down by 1.71 to close the day at 26.18, according to the VIX index. The index is a frequently used measure of market volatility.

As a sector, emerging markets was reeled tighter by 9 basis points to a spread of 375 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

No direction in emerging Europe

Emerging Europe was dormant on Tuesday, a London-based trader said. "It's horrible."

On Monday, equities provided direction, albeit a negative direction, but on Tuesday the major markets were "wobbling," he said.

The trader hoped to bring a fresh perspective back to the market after a week's holiday, he said, but "I really am completely and utterly clueless," he said.

Often time off gives the feeling that "temporarily, rightly or wrongly, that you can see the wood for the trees," he said, but without any added perspective, "it's difficult to get in."

"We're setting ourselves up for something," he said, but no one seems to know which way the market will turn when business resumes in earnest in September.

"Where are we going to be in a month or two?" he asked.

In emerging Europe, bid and offer spreads widened, and "most credits are lower in the time that I'd been away," he said, but not all.

Russia's OAO Severstal was "significantly stronger," the trader said.

Severstal's bonds due 2017 gained 3 points in one week to 95 bid, 95½ offered.

Among the sovereigns, Turkey's benchmark government bonds due 2030 were seen at 154 bid, 154¾ offered.

In Russia, oil exports reached 122.9 metric tons in the first half of 2009, an increase of just 0.2%, compared to the first half of 2008, the RIA Novosti News Agency reported.

Crude oil represented 32.7% of all exports for the period compared to 36.5% in 2008, the statistics agency Rosstat said.

The Economic Development Ministry said it does not see any significant changes in production or export figures within the next three years, the report said.

The Russian sovereign bonds due 2003 added ½ point to 100 5/8 bid, 100¾ offered.

Georgia leaves CIS

Meanwhile in the category, Georgia officially left the Commonwealth of Independent States, which emerged from the aftermath of the fall of the Soviet Union.

Georgia declared its intention to leave the bloc after the Russian invasion nearly one year ago.

"In August 2008, Russia, a CIS member state, unleashed against Georgia, also a CIS member state, military aggression, carried out occupation of the inalienable parts of the Georgian territory," the Foreign Ministry said in a statement.

After the formal break with the alliance, Tbilisi still maintained its interest in developing relationships with its neighbors.

"Georgia reaffirms its readiness to develop its bilateral relations with CIS member states on the basis of the principles of friendship and mutually beneficial cooperation," the statement continued.

LatAm 'suspiciously' higher

Latin America traded "suspiciously on the upside," said IDEAglobal's Alvarez.

"You could draw a parallel to the U.S. market, but they're actually trying to break into new upside terrain," he said.

Brazil seemed to lead the way higher, he said of a "core credit which has been a definite underperformer the entire year."

Investors with supporting liquidity are "not shy about coming in," he said.

The 7 1/8% Brazilian sovereigns due 2019 added 5/8 point to 103 3/8 bid, 104 1/8 offered, while the 11% Brazilian bonds due 2040 were quoted at 131 5/8 bid, 131¾ offered.

The liquidity on the sidelines is likely to support the levels Latin America has achieved throughout the year, but "the fundamentals externally don't add up," he said.

Meanwhile, in Latin America the market acts like "nothing happened and things are sensational," he said.

Investors must decide whether the category has gained more than it can support or if liquidity will come to the rescue and buy into the dips.

"I think the liquidity argument wins out," he said.

Around the category, it was Uruguay that gave up the most to profit-takers during Tuesday's session, although most of the underperformers were just "trending to the side," he said.

Uruguay's 7 7/8% bonds due 2033 gave back ½ point to 104¼ bid, 105½ offered.

The high-betas had a strong day as well.

Argentina's 8.28% discount bonds due 2033 jumped 1½ points to 60½ bid, 61½ offered while Venezuela's 9¼% government bonds due 2027 took on ¾ point to 71¾ bid, 72½ offered.

Elsewhere in the sector, Mexico president Felipe Calderon met with Brazil president Luiz Inacio Lula da Silva to sign agreements to further the trade volume between the two countries.

The trade between the two is modest, and the deal itself "is nothing to write home about," Alvarez said.

The 5 7/8% Mexican bonds due 2019 improved by 1 point to 103¼ bid, 104 1/8 offered.

Asia winds tighter

Asia performed well as equities recovered from Monday's beating and spreads were pulled tighter.

In the local markets, rivals for hosting outsourced businesses from the major markets, the Philippines and India, were reportedly ready to join forces.

The two countries will combine to lobby Washington, D.C., and the European Union not to place obstacles in the path of companies that would take business to cheap overseas labor centers such as those in the Philippines and India.

India leads the Philippines in outsourcing revenues, but Manila has been recruiting new business.

"Actually, American companies do outsourcing quietly because the recession has made the U.S. government keep an eye on outsourcing. Firms said outsourcing is really a business decision that has to be made for them to survive the crisis. We just told them, 'the Philippines is a market where you are all welcome,'" said trade secretary Peter Favila, according to the Manila Times.

Also in Indonesia, the national chamber of commerce, known as Kadin, said that interest rates on microcredit loans may drop by 12% to 14%, the Jakarta Post reported.

The loans are part of a government program to provide financing to small businesses.

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